MARKET

INTEGRATION
Mra Lyme F. Correche
 The Origins of
Exchange and the
Coincidence of
Wants
The coincidence of wants is an economic phenomenon
where two parties each hold an item that the other wants,
so they exchange these items directly without any
monetary medium.
The Coincidence of Wants
The Coincidence of
Wants
But what if he doesn’t want your food,
and you have many shirts already?
But what if a farmer wants to trade but
he only harvests once a year?
Money become the third good. It doesn’t spoil and was
agreed upon by all that it has value which all other goods
can be traded.
Pre-modern Money

Cattle Alcohol
Pre-modern Money

Tools & Knives (China) Giant Stone Money

(Island of Yap)
Pre-modern Money

Cowry Shells Gold & Silver

The Gold Standard

The gold standard is a monetary system where a

country's currency or paper money has a value
directly linked to gold. With the gold standard,
countries agreed to convert paper money into a fixed
amount of gold. A country that uses the gold standard
sets a fixed price for gold and buys and sells gold at that
price. That fixed price is used to determine the value of
the currency. 
Gold: The Early Years

At the start of this obsession, gold was solely used for

worship, demonstrated by a trip to any of the world's
ancient sacred sites. Today, gold's most popular use is
in the manufacturing of jewelry. Around 700 B.C.,
gold was made into coins for the first time,
enhancing its usability as a monetary unit. Before this,
gold had to be weighed and checked for purity when
settling trades.
England: The First to Adopt the Gold Standard

By 1821, England became the first country to officially

adopt a gold standard. The century's dramatic increase in
global trade and production brought large discoveries of
gold, which helped the gold standard remain intact well into
the next century. As all trade imbalances between nations
were settled with gold, governments had a strong incentive
to stockpile gold for more difficult times. Those stockpiles
still exist today.
The Fall of Gold Standard
With World War I, political alliances changed,
international indebtedness increased, and government
finances deteriorated. While the gold standard was not
suspended, it was in limbo during the war,
demonstrating its inability to hold through both good
and bad times. This created a lack of confidence in the
gold standard that only exacerbated economic
difficulties. It became increasingly apparent that the
world needed something more flexible on which to
base its global economy.
The Fall of Gold Standard
The result was an accentuated consolidation
of gold into the hands of a few large
nations. The supply of gold cannot keep
pace with its demand, and it is not flexible
under trying economic times. Also, mining
gold is costly and creates negative
environmental externalities.
US Trade Surplus
 The Bretton
Woods System
A new international monetary system
was forged by delegates from forty-
four nations in Bretton Woods, New
Hampshire, in July 1944. Delegates to
the conference agreed to establish the
International Monetary Fund and what
became the World Bank Group.
The Deal Established a Global Exchange Rate System

Under the deal reached in July

1944, countries would set their
currency to the U.S. dollar at a
fixed, but adjustable rate, while the
dollar would then be pegged to gold
at a rate of $35 per ounce. 
Applying the Par Value

How many Nicaraguan Cordoba

(C$) is needed for 1 ounce of
gold, if Nicaragua pegged its
currency at C$ 36.48 for $1, and
$ is pegged to gold at a rate of
$35 per ounce?
2 International Financial
Institutions emerged out of
Bretton Woods
The IMF and the World
Bank were created in July
1944 at an international
conference in the United
States (in Bretton Woods,
New Hampshire) that
established a framework
for economic cooperation
aimed at creating a more
stable and prosperous
global economy. 
Pres. Nixon and the Collapse of
the Bretton Woods System
The system dissolved between 1968 and
1973. In August 1971, U.S. President
Richard Nixon announced the "temporary"
suspension of the dollar's convertibility into
gold. While the dollar had struggled
throughout most of the 1960s within the
parity established at Bretton Woods, this
crisis marked the breakdown of the
system. An attempt to revive the fixed
exchange rates failed, and by March 1973
the major currencies began to float against
each other.
The Floating Exchange Rate

A floating exchange rate is an

exchange rate system where a
country's currency price is
determined by the foreign
exchange market, depending
on the relative supply and
demand of other currencies.
Where is the Demand being derived?
The demand of the
currency is derived from
the foreigner’s
demands of a country’s
goods and services and
financial assets.
Where is the Supply being derived?
The supply of the
currency is derived from
the resident’s demands
of foreigner’s goods
and services and
financial assets.
The Floating Exchange Rate

Let’s imagine that the US small to

medium enterprise exports Product A
by 60% and that China is its top
buyer this year. More US exports will
be sold to China. This increase in
demand for US exports will also
increase the demand for US
dollars. This is why the demand
curve shifts outwards from D1 to D2.
The exchange rate of US dollars to
the Chinese Yuan rises, so the US
dollar appreciates.
The Floating Exchange Rate

Imagine that Nigeria attracts $40

billion (USD) in foreign direct
investment (FDI). Remember that
for Nigeria, it is an inflow of $40
billion while for the US it is an
outflow. Because of this, the
supply for US dollars increases,
thus the supply curve shifts
outward from S1 to S2. This leads
to a depreciation of the US
dollar.
The Floating Exchange Rate
How to compute exchange rate?

The exchange rate is

defined as the rate based
on which two countries are
involved in trade exchange
marketable items or
commodities. It is the cost
of exchanging one currency
for another currency.
Applying the Exchange Rate Formula

10 students from Samar State University will be

participating in the Short-Term Exchange
Program. They will be immersed in Dong Thap
University in Vietnam. They have accumulated a
budget of Php 50, 000.00 each. Upon arrival in
Vietnam International Airport, they have
exchanged their currency to Vietnam Dong
amounting to ₫20, 984,500 each. Determine the
exchange rate.
Applying the Exchange Rate Formula

Let us take the example of an individual

planning a trip from the USA to the
European Union. He has a planned
budget of $5,000. The travel agent
informs the traveler that if he exchanges
US dollars to Euro, he will get €4,517.30.
Help the traveler determine the exchange
rate between the USA and the Euro.
How currency appreciation can impact prices
The value of a currency is an important determinant for
prices in international trade. When the value of a
currency changes, prices for goods traded using that
currency can be affected. A currency appreciation
(when the value increases over time) results in a
lower effective price for imported goods; currency
depreciation (when the value decreases over time)
translates to higher import prices. By and large,
firms across the world have adopted the relatively
stable U.S. dollar as their preferred currency for import
and export transactions.
How the USD Became the World Reserve
Currency 
After the US abolished the Bretton Woods
system in 1971, the dollar became what is known
as fiat money. A fiat money is a type of currency
that is declared legal tender by a government but
has no intrinsic or fixed value and is not backed
by any tangible asset, such as gold or silver.
How the USD Became the
World Reserve Currency 
Delegates from 44 Allied countries met in Bretton
Wood, New Hampshire, in 1944 to come up with
a system to manage foreign exchange that would
not disadvantage any country. The delegation
decided that the world’s currencies would no
longer be linked to gold but could be pegged to
the U.S. That's because it was linked to gold.
How the USD Became the
World Reserve Currency 

The dollar remains the world's

reserve currency today. Central
banks hold around 59% of their
reserves in U.S. dollars, according
to the International Monetary Fund
(IMF).
Why is the US dollar so strong?

The dollar’s value comes from the US’ position as

a critical global economic power and the
country's political and economic stability. While it
may hold less value than such currencies as the
Swiss franc or the British pound, the dollar’s
global use makes it a more commercially viable
currency.
Why is the US dollar so strong?

Today, the US dollar (USD) is the most

prominent currency in the world. This is
tied to the fact that the US has the
largest economy in the world, along with
the dollar’s use globally. Not only is it
commonly exchanged outside the US,
but several nations have tied their
currencies to the dollar or adopted it as
their official currency.
Why is the US dollar so strong?

In 2022, about half of

international trade was
exchanged in US
dollars, as were about
half of all international
loans and debt
securities
Why is the US dollar so strong?
Citizens of foreign nations
often use the US dollar to
buy goods and services in
their country rather than
use their domestic
currency. As of March
2021, nearly half of all US
banknotes were held by
foreign citizens,
amounting to roughly $950
billion.
Effects of Dollars to Philippine Economy

The weakening of the Peso occurs when the demand for

the Dollar increases. The strong demand for the Dollar is
what makes it strong. The inflation we have makes foreign
goods and services much more expensive.
Effects of Dollars to Philippine Economy
For example, as gas prices continue to increase in the global market, the
government would need to spend more Dollars than they take in, leading to a
demand for the currency. This happens because the Philippines exchange rate
system is ‘floating,’ which means that the exchange rate between the two
currencies depends on the current supply and demand of the Dollar. Thus, if the
Philippines continues to spend more Dollars due to the rising prices in the global
market, then the Philippine Peso will not cease to depreciate in the near future.
Effects of Dollars to Philippine Economy

The increase in the value of the US Dollar might bring good news,
especially for Overseas Filipino Workers (OFWs) or other Filipinos who
earn in Dollars. This is because their remittances will be much higher
given the increase in exchange rates in the Dollar vs. Peso. This would
encourage them to send money to their loved ones and increase the
purchasing power of the recipient families.
Effects of Dollars to Philippine Economy

Exporters also share the same sentiment with the increase in the Dollar.
It is because the local products that will be sent abroad will become
much cheaper to purchase and attractive to foreign consumers.
However, there is an existing trade deficit in the Philippines, and the
current increase in the prices of oil would only widen the deficit that is
happening in the country. Its implications would mean higher prices of
oil and consumer goods effects that we currently feel today.
Effects of Dollars to Philippine Economy

In the case of ordinary Filipinos, inflation would mean that

the general prices of goods and services will increase. This
will greatly affect low to middle-income households as they
would be able to buy fewer products with the same amount
of income that they had. Worse, this might even lead
Filipinos to become poorer, given the economic woes we
are facing today.
International financial institutions
(IFIs) are organizations that provide
financial assistance and support
to countries and regions around
the world. These institutions are
typically created by multiple countries
and operate with the goal of
promoting economic development,
reducing poverty, and stabilizing
global financial systems.
● Some of the most well-known
IFIs include the World Bank, the
International Monetary Fund
(IMF), and regional development
banks such as the Asian
Development Bank and the
African Development Bank.